Program in firm’s NY office analyzes challenges posed by CFIUS in doing cross-border deals with Chinese and other foreign partners where strategic assets may be at risk
Looking to shed light on the increasing tension that national security concerns are creating for companies doing deals with foreign partners, Stroock convened a forum on June 15, 2017 in its New York office to help business owners, investors and government advisers navigate what has become a charged playing field for inbound investment into the U.S.
A key focus of the event was to address the challenges of cross-border transactions under review by the powerful Committee on Foreign Investment in the United States; a CFIUS review has the potential to scuttle deals involving technology and other assets deemed of strategic interest to America’s national security.
Stroock’s program, entitled “Foreign Investment and National Security in the Age of Trump,” brought together a panel of leading CFIUS experts, including Rhodium Group founding partner Daniel H. Rosen; Stroock National Security/CFIUS/Compliance Group special counsel and former CFIUS advisor Anne Salladin; and Beacon Global Strategies LLC founder and managing director Andrew Shapiro. The panel shared insights regarding the CFIUS framework’s impact on corporate deals involving foreign parties – whether private companies and investors or state-owned entities — along with efforts to expand the scope of CFIUS.
Chris Griner, Chair of Stroock’s National Security/CFIUS/Compliance Group and Co-Managing Partner of the firm’s Washington, DC office, and Ross F. Moskowitz, a real estate partner and member of the firm’s Executive Committee, moderated the program.
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Mr. Griner, along with Stroock Co-Managing Partner Jeff Keitelman, recently authored a bulletin titled “Real Estate in the Crosshairs: Congressional Calls to Step Up Scrutiny of Foreign Investment,” which addresses potential changes to the General Services Administration’s procurement process that lessors may face and the increased scrutiny surrounding real estate transactions involving foreign parties.
Robert Abrams, former New York State Attorney General and Chair of Stroock’s Government Affairs Group, introduced the program and speakers.
Mr. Abrams began by noting, “Investment in America is a positive goal – it’s a catalyst to both strengthening our economy and creating jobs. At the same time, there has to be an analysis as to whether or not any foreign investment is going to implicate national security interests. CFIUS is there to try to strike that balance and exercise that review.”
Foreign investment is an essential component for economic growth in the United States, accounting for nearly $400 billion in investment in 2016.
“Given the continuing influx of foreign investments in the U.S., it is vital to take into account the potential for a CFIUS review and the costs, delays, and other closing issues that may result,” Mr. Griner explained.
“In an age of heightened national security, CFIUS has lately come into the spotlight. Its prominence has also been driven by a combination of globalization, extraordinary Chinese investment, and some trade friction,” said Ms. Salladin.
The panel focused on direct investment from China, which totaled $46 billion in 2016 and had a broad spread geographically and across industries – from semiconductors to agriculture, consumer electronics, food and even real estate.
“The broad footprint of Chinese investment reflects two things: the diversity of the American economy and how much value there is here attractive to a global investor, and also how diverse China’s economy is,” said Mr. Rosen, who was introduced as “a guru on foreign investment statistics and analysis.”
Mr. Moskowitz, a former official with the New York City Economic Development Corporation who has negotiated numerous large real estate transactions involving foreign investors, pointed out that where real estate assets are concerned, Chinese companies are investing with a long-term view, looking for best practices and hiring locally.
In addition to exponential growth in Chinese investment in the U.S., there has been a change over time from investments made predominantly by large state-owned enterprises to those coming from private companies, Ms. Salladin noted – she estimated that as many as 70% of inbound deals from China now include some private parties.
Ms. Salladin understands the regulatory review process better than most. Prior to joining Stroock, she spent nearly 20 years in the office of the Assistant General Counsel for International Affairs of the U.S. Department of the Treasury, which chairs CFIUS. She reminded the audience that the biggest lesson for companies is just how critical it is to do national security due diligence at the outset of a deal.
Deals in areas considered critical to U.S. national security interests, such as semiconductors, refiners and chemicals, are given added layers of scrutiny, and sometimes, mitigation, Ms. Salladin explained. A number of high-profile tie-ups have had to be abandoned following the intense glare of a CFIUS review.
The conversation naturally turned to the Trump administration’s approach to CFIUS and the changes on the horizon. While CFIUS challenges were regular events during President Obama’s tenure, Mr. Trump’s “America-first” outlook has raised expectations that foreign-led deals may encounter stiffer resistance. That’s especially true since the President remains the final decision-maker on whether a deal will be blocked, with fundamentally no appeals process.
“It’s clear that the administration has interest in making changes to CFIUS,” said Mr. Shapiro. He noted that some reform has been mentioned by several administration officials, including Secretary of Defense James Mattis, Treasury Secretary Steven Mnuchin, Director of National Intelligence Dan Coats, and National Economic Council head Gary Cohn. On the Hill, there’s a bipartisan consensus on the need to change CFIUS as well.
“My view is that change is coming – but it’s uncertain what that will look like,” Mr. Shapiro said. “A particular focus could be how joint ventures are treated, which are viewed as a potential loophole.”
In the meantime, deals—particularly those involving critical infrastructure—are taking longer because of a lack of bandwidth in the Treasury Department with many key appointed positions yet to be filled.
The Chinese government has put its own restrictions on outbound investments over concerns about capital flight, as its foreign exchange reserves have fallen from $4.2 trillion to around $2.6 trillion. Real estate, as one of the most liquid direct investment sectors, has been considerably impacted by the greater capital controls and tighter screenings, said Mr. Rosen.
Mr. Rosen noted two recent examples, including the dropped bids for the Starwood Group and 666 Fifth Avenue, by major Chinese holding company Anbang Insurance Group. Anbang acquired the famed Waldorf Astoria Hotel in 2015.
Partly because of these changes to Chinese government policy, the prevailing notion has been that incoming investment from China would slow in 2017; nonetheless, Mr. Rosen says that Rhodium’s count for the year through May has totaled $22 billion worth of deals.
Today’s event was the latest in a series of Government Leadership forums hosted by Stroock. Stroock’s Government Relations Practice, led by Mr. Abrams, is comprised of former prosecutors, judges, and government agency officials. Mr. Abrams also served as President of the National Association of Attorneys General, Executive Chair of New York State Attorney General Andrew Cuomo’s Transition Committee and Honorary Co-Chair of Attorney General Schneiderman’s Transition Committee.